The Non-Banking Financial Companies (NBFCs) are Companies who act alike Banks. NBFC License is a Company duly registered under Act whose principal business is to conduct the financial activity. In...
Earlier the NBFC lending or obtaining assistance for any business person was a cumbersome procedure because of the reasons like:
- High sky interest rates;
- Number of requirements of collateral securities while providing credit;
- Time-consuming process; all these things made the procedure of obtaining loan very complex.
With the entry of NBFC in the Microfinance industry in India, all these complex procedures became so ease and the procedure of obtaining loan became simple. As with the passage of time. NBFC license has now been recognized as the systematically important component in the financial system.
The reason why the formation of NBFC became an integral part of the society:
There are the following reasons why the formation of NBFC has become an integral part of the society:
- They complemented the Banking Sector in reaching out credit to the unbanked sector of the society i.e. micro, small, medium enterprises.
- Their ground-level understanding of their client’s credit needs.
- They have a sector-specific expertise that allows them to have edge over there competitors.
- Low cost of establishing the NBFC as compared to other financial institutions.
- The Less time-consuming process of registration of NBFC.
- They play a critical role in the development of infrastructure, transport and employment generation.
- They provide support for economically weaker sections of the society.
The government has also played a very important role in promoting the NBFC, as the main aim of Government is to focus on the promotion of entrepreneurship so that India can emerge as a country of job creators instead of job seekers. To promote entrepreneurship finance is the base and that need gave rise to the formation of NBFC.
This success of NBFC over MFI is not an overnight journey it took a lot of efforts. As initially NBFC were required to comply with various regulations to create trust among the various authorities that they are reliable institutions to provide financial assistance.
They were required to comply with the following regulations:
- They are compulsorily required to register with RBI before commencing the business.
- They have to obtain the certificate of registration before commencing the business.
- Should have a net-owned fund of Rs. 2 Crore.
- Maintenance of share of deposits in liquid assets.
- If they accept the deposit without being authorized they will be liable for the criminal offense.
- Deposit-taking NBFC’s has to mandatorily constitute various committees
Future of NBFC:
With the ongoing stress on the Public Sector Banks due to increasing in bad debts, their ability to lend is deteriorating their demand day by day and providing an opportunity to NBFC to increase their presence.
The success of NBFC can be seen in following ways:
- By their effective risk management capability;
- Wider reach to the clients;
- Control over the bad debts;
- The better understanding of the customer segment.
The latent credit demand of emerging India will allow the NBFC’s to fill the gap, especially where traditional banks are unable to serve. Additionally, to improve macro-economic conditions, high credit penetration, increase in consumption will allow the NBFC’s to grow at a healthy rate. As per the report of the CAGR, it has been estimated that NBFC’s will grow at the rate of 25%-33% over the next five years.
Strong urban demand, high credit penetration will drive the growth in consumer finance segment. Partnership with Payment Banks, Bill payment provider and other financial institutions such as insurance and asset management companies will help in their growth. the market will help them in proving themselves to be a better alternative as compared to traditional ways of banks.
The number of start-ups in India has grown significantly from merely 2 in 2013 to 40 in 2017. These firm either operate as NBFC’s or P2P lending marketplace for connecting the individual borrowers and lenders directly.
The rapid increase in the number of customers over the past few years, speed, simplicity, convenience and timely credit to borrowers which are regarded as ineligible as per the Bank criteria has increased the demand of NBFC.
The growing importance of NBFC segment in Indian Financial system has led to change the framework of NBFC on the continuous basis. The regulations of NBFC has gone through a cyclical phase from simplified regulations too stringent regulations and finally now towards rationalization.
Factors contributing to the growth of NBFC in the economy:
- Latent credit demand.
- Stress on public sector units.
- Increased consumption.
- Wider reach where traditional banks do not lend.
Reason for the growth of NBFC:
- The ability to understand the customers’ profile and offer the best product according to the customers need.
- They offer the competitive interest rates.
- Provide flexible repayment scheme and extended loan tenure.
- The minimum number of documents are required at the time of providing financial assistance as compared to banks.
- Loan seekers have flexible eligibility criteria.